Question

Define and explain Exchange rate pass-through.

Answer 1

Exchange-rate pass-through (ERPT): Related to law of one price & PPP purchasing power parity, it is a measure of the responsiveness of international prices to changes in the exchange rates. i.e., elasticity of local-currency import prices w.r.t. local-currency price of the foreign currency, measured as % change, in local currency, of import prices resulting from 1% change in exchange rate between exporting & importing countries. When exchange-rate pass-through is high, there is higher transmission of inflation among the countries.